Financial Reporting · Ind AS 7 Statement of Cash Flows

Classification of Cash Flows into Operating, Investing and Financing under Ind AS 7

Updated 5 October 2026 · Fact-checked

Ind AS 7 requires every cash flow to be reported under operating, investing or financing activities. Operating covers principal revenue-producing activities, investing covers long-term assets and investments, financing covers equity and borrowings. To solve a question, identify the nature of each item, apply the specific rule for interest, dividends and tax, then total each section.

Understand Classification of Cash Flows into Operating, Investing and Financing

A cash flow statement answers one question: where did cash come from and where did it go? Ind AS 7 splits the answer into three buckets so a reader can see how much cash the business earns, how much it invests and how it is funded.

Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing. Think cash received from customers, cash paid to suppliers and employees. It is the residual bucket: if an item is not clearly investing or financing, it is operating.

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Think purchase or sale of property, plant and equipment, intangibles, and investments in shares or debt instruments of other entities. Only expenditure that results in a recognised asset qualifies for investing.

Financing activities change the size and composition of contributed equity and borrowings. Think issue of shares, buyback, raising or repaying loans, and payment of lease liabilities (principal portion).

The tricky items are interest, dividends and income tax. Interest and dividends received and paid must be disclosed separately. Taxes on income are shown separately and classified as operating unless they can be specifically identified with financing or investing activities.

On interest and dividends, Ind AS 7 does not fix the treatment. The entity chooses a classification and applies it consistently from period to period. Non-financial entities commonly show interest and dividends paid as financing activities, and interest and dividends received as investing activities.

A financial entity usually shows interest paid and interest and dividends received as operating, because they arise from its principal revenue-producing activity. Dividends paid are usually shown as financing.

In an exam, follow the policy the case states. If none is stated, use the common treatment for that type of entity and say so in your answer.

Key rules to remember

Operating activities: Principal revenue-producing activities + all activities that are not investing or financing; Residual category. Includes cash receipts from customers, payments to suppliers and employees, and usually income tax paid.
Investing activities: Cash paid for or received from long-term assets and investments not treated as cash equivalents; Only expenditure resulting in a recognised asset is investing. Example: purchase of PPE is an outflow, sale of PPE is an inflow.
Financing activities: Cash flows that change contributed equity and borrowings; Includes share issue, buyback, loan proceeds and repayments, and principal repayment of lease liabilities.
Interest and dividends: Disclose separately and classify consistently. Non-financial entity (common): interest and dividends paid = financing; interest and dividends received = investing. Financial entity (usual): interest paid and interest and dividends received = operating; dividends paid = financing; Ind AS 7 does not fix the treatment. The entity chooses a classification and applies it consistently from period to period.
Income taxes: Separate disclosure; operating unless specifically identified with investing or financing; If tax on a transaction can be identified with investing or financing, show it there. Otherwise allocate to operating.
Non-cash transactions: Excluded from the cash flow statement; disclosed elsewhere; Example: acquiring an asset by issuing shares or taking a finance lease. No cash moves, so no cash flow line.
Interest capitalised: Total interest paid is disclosed whether expensed or capitalised; Total interest paid during the period is disclosed in the cash flow statement, whether it is expensed or capitalised. Its classification follows the entity's consistent policy. Cash interest capitalised into an asset's cost may be shown as investing, as part of the expenditure on the asset, or as financing.

How to solve Classification of Cash Flows into Operating, Investing and Financing questions

Use this sequence for any classification question, whether it is a list of items or a full statement.

1List every item given and mark whether it involves actual cash. Drop non-cash items such as depreciation, provisions, bonus shares and assets acquired on credit settled by shares.
2Ask what the item is: a day-to-day revenue activity, a long-term asset or investment, or a funding change in equity or borrowings.
3Place it in operating, investing or financing based on that nature, using operating as the default if it is neither of the other two.
4Apply the special rules. Interest and dividends are disclosed separately and classified under the entity's consistent policy, so follow the policy the case gives. If none is given, a non-financial entity commonly shows interest and dividends paid as financing and interest and dividends received as investing. A financial entity usually shows interest paid and interest and dividends received as operating, and dividends paid as financing. Income tax is operating unless specifically linked to investing or financing.
5Check the direction of each flow: inflow or outflow, and net off only where the standard allows (for example, rapid-turnover items or receipts and payments on behalf of customers).
6Total each section, then reconcile the net change to the opening and closing cash and cash equivalents.
7Check whether the entity is a financial entity, since that changes the usual treatment of interest and of dividends received.

Quickest way: Three-question tag method

When to use it: Use when a question gives a list of transactions and asks you to classify them, especially in MCQs or a short written answer.

Question 1: Is cash actually moving? If not, exclude it.
Question 2: Does it buy or sell a long-term asset or an investment? If yes, investing.
Question 3: Does it raise or repay capital or borrowings? If yes, financing.
Anything left is operating, including income tax unless clearly tied to another category.
For interest and dividends, follow the entity's stated consistent policy. If none is given, use the common treatment. Non-financial entity: received is investing and paid is financing. Financial entity: interest paid and interest and dividends received are operating, and dividends paid are financing. Then move on.

Common mistakes in Classification of Cash Flows into Operating, Investing and Financing

Treating depreciation or provisions as cash flows in the classification.
Students see them in the profit and loss account and assume they belong somewhere in the statement.
Fix: Remember they are non-cash. They appear only as adjustments to profit in the indirect method, never as an investing or financing item.
Ignoring the entity's stated policy on interest and dividends, or changing the classification from one period to the next.
Students assume interest is always operating because it is a P&L expense, or pick whichever placement suits the answer.
Fix: Ind AS 7 does not fix the treatment, but the entity must classify consistently and disclose interest and dividends separately. Follow the policy given in the case. If none is given, a non-financial entity commonly shows interest and dividends paid as financing and interest and dividends received as investing. A financial entity usually shows interest paid and interest and dividends received as operating, and dividends paid as financing.
Showing income tax in financing or investing without a link.
Students split tax on a sale of an asset by habit or guess.
Fix: Show tax as operating unless the tax is specifically identifiable with an investing or financing transaction.
Classifying all expenditure on assets as investing.
Students assume any spending on assets is investing.
Fix: Only expenditure resulting in a recognised asset is investing. Repairs charged to profit and loss are operating.
Showing the full proceeds of a loan repayment as a net figure together with new borrowings.
Students net inflows against outflows to save time.
Fix: Show proceeds from borrowings and repayments separately in financing, unless the standard permits netting for rapid-turnover items.
Including non-cash transactions, such as an asset acquired by issuing shares, in investing and financing.
Students see an asset and equity both change and assume a cash flow occurred.
Fix: Exclude it from the statement and disclose it separately in the notes.

Worked examples

Example 1

Case: Meridian Ltd is a manufacturing company and not a financial entity. It follows a consistent policy of showing interest received as investing and interest and dividends paid as financing. During the year it had these cash items: (a) receipts from customers ₹80,00,000; (b) payments to suppliers and employees ₹55,00,000; (c) purchase of machinery ₹12,00,000; (d) interest received on fixed deposits ₹1,00,000; (e) interest paid on term loan ₹2,00,000; (f) dividend paid to shareholders ₹3,00,000; (g) income tax paid ₹6,00,000, not linked to any investing or financing transaction; (h) proceeds from issue of shares ₹10,00,000. Classify each item under Ind AS 7 and compute net cash from each activity.

Show the solution

Operating: (a) receipts ₹80,00,000 inflow, (b) payments ₹55,00,000 outflow, (g) income tax ₹6,00,000 outflow as it is not linked to investing or financing.
Net operating = 80,00,000 − 55,00,000 − 6,00,000 = ₹19,00,000 inflow.
Investing: (c) purchase of machinery ₹12,00,000 outflow, (d) interest received ₹1,00,000 inflow, because Meridian Ltd, a non-financial entity, classifies interest received as investing as its consistently applied policy.
Net investing = 1,00,000 − 12,00,000 = ₹(11,00,000) outflow.
Financing: (h) share issue ₹10,00,000 inflow, (e) interest paid ₹2,00,000 outflow, (f) dividend paid ₹3,00,000 outflow, because Meridian Ltd classifies interest paid and dividends paid as financing as its consistently applied policy.
Net financing = 10,00,000 − 2,00,000 − 3,00,000 = ₹5,00,000 inflow.
Net change in cash = 19,00,000 − 11,00,000 + 5,00,000 = ₹13,00,000 increase. Other permitted classifications of interest and dividends would change the section subtotals but not the net change in cash.

Answer: Operating ₹19,00,000 inflow; Investing ₹(11,00,000) outflow; Financing ₹5,00,000 inflow; net increase in cash and cash equivalents ₹13,00,000.

Example 2

Case: Kaveri Finance Ltd is a non-banking financial company. During the year it received interest on loans given to customers of ₹40,00,000, paid interest on its borrowings of ₹18,00,000, bought office equipment for ₹4,00,000 in cash, and acquired land worth ₹25,00,000 by issuing equity shares to the seller. Advise how each should be treated under Ind AS 7.

Show the solution

Interest received on loans and interest paid on borrowings: for a financial entity these arise from its principal revenue-producing activity, so both are usually classified as operating activities, with interest received and interest paid disclosed separately.
Operating effect: interest received ₹40,00,000 inflow and interest paid ₹18,00,000 outflow, net ₹22,00,000 inflow from these items.
Purchase of office equipment for cash ₹4,00,000 results in a recognised asset, so it is an investing outflow.
Land acquired by issuing shares involves no cash movement. It is a non-cash transaction, excluded from the statement of cash flows and disclosed in the notes.

Answer: Interest received ₹40,00,000 and interest paid ₹18,00,000 are operating; equipment ₹4,00,000 is an investing outflow; the ₹25,00,000 land-for-shares deal is a non-cash transaction, excluded and disclosed separately.

Exam tips

Before you draw up the table, check whether the entity is financial or non-financial. Then apply the policy the case states for interest and dividends, or the common treatment for that type of entity if none is stated.
In case-scenario MCQs, check first whether the entity is a financial institution, since a financial entity usually treats interest paid and interest and dividends received as operating.
Look for traps: non-cash items, capitalised interest and tax linked to a specific sale. Total interest paid is disclosed even when part of it is capitalised, and its classification follows the entity's consistent policy. Read each line of the case for these.
Show inflows and outflows separately in your working and mark outflows with brackets to avoid sign errors.
Reconcile your three totals to the change in cash and cash equivalents. A mismatch tells you an item is misplaced.

Practice questions from Ind AS 7 Statement of Cash Flows

Classification of Cash Flows into Operating, Investing and Financing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Classification of Cash Flows into Operating, Investing and Financing: frequently asked questions

Where do I show interest and dividend paid in the cash flow statement under Ind AS 7?

Ind AS 7 requires interest and dividends paid and received to be disclosed separately and classified consistently from period to period. It does not fix one placement. A non-financial entity commonly shows interest and dividends paid as financing and interest and dividends received as investing. A financial entity usually shows interest paid and interest and dividends received as operating, with dividends paid as financing.